Edited version of private advice

Authorisation Number: 1051696962925

Date of advice: 24 June 2020

Ruling

Subject: GST on the sale of land

Question

Is your supply as mortgagee in possession (MIP) of the Property to the Purchaser under the Contract an input taxed supply of residential premises to be used predominantly for residential accommodation (not being commercial residential premises or new residential premises)?

Answer

Yes.

Relevant facts and circumstances

X (You) are registered for GST.

You are a subsidiary of Y.

W as trustee for the M (a unit trust) (Mortgagor) is the registered proprietor of the property known as X, being the land in Lot X on Plan of Subdivision P as described in Certificate of Title Volume A Folio B (Property).

You were the actual entity that loaned the money to the Mortgagor to purchase the Property.

The Mortgagor is registered for GST with effect from Z.

The Property is approximately X hectares in size and is zoned low density residential. As detailed in the valuation report prepared by V (Valuer) dated X (Valuation Report), the Property is a rural lifestyle holding comprising a cottage (Cottage), a machinery shed/stable, a gravel driveway and 3 fenced paddocks (which are only accessible via the areas fenced off for the gravel driveway).

The Cottage is approximately Xm² containing an open plan kitchen/lounge/dining room, two bedrooms, bathroom and toilet. The machinery shed/stable is approximately Xm².

Services connected to the site include electricity, mains water and a septic tank.

The Valuation Report states that while the Cottage is not habitable in its present state and requires maintenance and repair, the fitting of hot water service, stove, laundry trough and repair to broken window pane to living area (at an estimated cost of $X to $XX) would enable the Property to be rented out for $X per week.

The Valuation Report describes that the Property is located within a residential lifestyle retreat area. This is an area characterised by being situated at the interface between the established suburban area and the rural commercial farming sector. The properties are not independently used for income production although may have an elements of income production as hobby farms. The significant market determinator still tends to be the residential dwelling and its lifestyle curtilage including gardens, although a large machinery shed is considered to be a useful additional building. The remaining land may be either cleared or partly cleared or feature native bush.

The Mortgagor has recently defaulted on its loan and you (as mortgagee) entered into possession of the Property in accordance with the terms and conditions of the Mortgage.

You subsequently entered into a contract of sale (Contract) dated X with P (as purchaser) in respect of the Property in exercising the power of sale conferred by the terms of the Mortgage.

The Contract is due to settle on X.

The Contract provides that the Property is sold with vacant possession.

The Property is currently leased to Y pursuant to an REIV commercial lease for a term of 18 months commencing on X (Lease). The rent is $X per calendar month. The permitted use under the lease is "Machinery and Equipment Storage - storage of material". The Lease will terminate on X.

You understand that the only reason that a commercial lease rather than a residential lease was entered into was so that the lease and tenancy would not be subject to the Residential Tenancies Act 1997 due to concerns about the state of repair of the of the Cottage given the requirements of a landlord to maintain a property pursuant to the Residential Tenancies Act 1997. You understand that no one is currently residing in the Cottage but that the Cottage, in its current state of repair, may have been habited by a sub-tenant for a period of approximately X years.

The Property was advertised for sale on realestate.com.au as a residential and not commercial property.

The Valuer undertook the valuation of the Property on the basis that the property would not be subject to GST on the sale.

You have not received a written notice from the Mortgagor stating that if they were to supply the Property, it would not be a taxable supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 9-5

A New Tax System (Goods and Services Tax) Act 1999, section 40-65

A New Tax System (Goods and Services Tax) Act 1999, section 105-5

A New Tax System (Goods and Services Tax) Act 1999, section 195-1

Detailed reasoning

Section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to supplies by creditors in satisfaction of debts:

105-5 Supplies by creditors in satisfaction of debts may be taxable supplies

(1)  You make a taxable supply if:

(a)  you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b)  had the debtor made the supply, the supply would have been a taxable supply.

(2)  It does not matter whether:

(a)  you made the supply in the course or furtherance of an enterprise that you carry on; or

(b)  you are registered, or required to be registered.

(3)  However, the supply is not a taxable supply if:

(a)  the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b)  if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(4)  This section has effect despite section 9-5 (which is about what is a taxable supply).

You have not received a written notice from the Mortgagor that the sale of the Property would not be a taxable supply if they were to make it. Therefore it is necessary to ascertain whether the supply of the Property would constitute a taxable supply had the Mortgagor sold the Property.

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with the indirect tax zone (Australia); and

(d) you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

For the supply of the Property to be a taxable supply, all of the requirements in section 9-5 must be satisfied and it must not be GST free or input taxed.

In your case all the positive elements of section 9-5 are fulfilled. The next issue to ascertain is whether the supply of the Property will be GST-free or input taxed.

The Cottage

Section 40-65 provides:

40-65             Sales of residential premises

(1)   A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2)   However, the sale is not input taxed to the extent that the residential premises are:

(a)   commercial residential premises; or

(b)   new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term 'residential premises' is defined in section 195-1 as land or a building that:

(a)  is occupied as a residence or for residential accommodation; or

(b)  is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5; Goods and services tax: residential premises considers how Subdivision 40-C (including section 40-65) applies to supplies of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement in subsection 40-65(1) that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities including sleeping, kitchen, living and bathroom facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

In this case, the Property contains a cottage containing two bedrooms, an open plan kitchen/lounge/dining room, bathroom and toilet. The Property also contains a machinery shed/stable.

However, paragraph 20 of GSTR 2012/5 provides that premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation.

The Valuation Report considered that the Cottage is not habitable in its present state and requires maintenance and repair. However it was also noted that the fitting of hot water service, stove, laundry trough and repair to broken window pane to living area (at an estimated cost of $X to $XX) would enable the Property to be rented out for $X per week.

Given the above, we consider the Cottage falls within the scope of 'residential premises' as defined in section 195-1.

The Surrounding Land

The GST Act does not contain any restrictions as to the area of land surrounding a residential dwelling that can be included within the definition of 'residential premises'. Paragraph 46 of GSTR 2012/5 provides:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

Being in a semi-rural setting, we are of the view that the whole of the land surrounding the Cottage contributes to its enjoyment and the fulfilment of its purpose of a cottage. Based on the information contained in the Valuation Report, the land surrounding the Cottage is so intrinsic to its use and enjoyment as to be included as part of the residential premises.

For the above reasons, we consider your supply of the whole Property to the Purchaser under the Contract is an input taxed supply of residential premises to be used predominantly for residential accommodation (not being commercial residential premises or new residential premises).